While shares of social media giant Facebook Inc. (FB) have caught something of a break this week as Chief Executive Officer Mark Zuckerberg testifies in Congress in the wake of the company's most recent data scandal, one team of analysts on the Street has sided with the tech bears.
On Thursday, Bank of America Merrill Lynch released a research note suggesting that now's a good time to reduce tech holdings, as it foresees no turnaround in the near future in light of the sector's 4% decline in March. Michael Hartnett, BofA's head of global investment strategy, wrote that while "the sector isn't going away," the "cyclical picture has gotten a bit cloudier, at a time when the stocks are priced to perfection."
Hartnett argues that tech's lofty valuations are too expensive in light of a momentous "Occupy Silicon Valley" movement, driven by a backlash from governments and users around the world concerned that about the lack of regulation of the sector and the growing dominance of tech names such as Amazon.com Inc. (AMZN) across various facets of consumer life. Much like the burn felt by financials following the 2008 financial crisis, the analyst sees tech facing a regulatory crackdown in the U.S. and abroad, leading them to inevitably fall from "bubble peaks."
'Cash Rich and Tax Light' = Easy Target
The BofA analyst estimates that pending U.S. & EU regulations would reduce tech industry revenues by 4%, noting that imposing new rules would be relatively easy for lawmakers given the "cash rich and tax light" nature of the sector. America's tech firms have just 27,000 regulations compared to 215,000 for manufacturing and 128,000 for financials.
Love for big tech has lifted stocks to "fancy valuations" and has driven the market value of the sector to $6.4 billion, noted Hartnett, adding that most of the market value is limited to a few crowded stocks. He views "earnings hubris" as another issue facing tech, highlighting the fact that tech and communications account for almost a quarter of the S&P 500's earnings, and just 2% of 250 Wall Street recommendations on the top five tech names are "sells." (See also: Market Weakness Time to Buy Small Caps, Values.)
Not all are so bearish on the high-flying sector. Many see the sell-off in big tech names as an opportunity to buy on the dip and hold as the FAANG stocks and their other large-cap peers continue to beat out competition and post significant revenue growth in the long-term.
Hartnett contends "there are tremendous fundamental reasons to think the asset class can do well over the medium term." Alluding to double-to-triple-digit returns big tech has provided investors over recent years, Hartnett suggested, "if you've made a lot of money, just be a little bit careful here." (See also: ‘Revenue Juggernaut’ Facebook is 'Long-Term Hold’.)